Wednesday, January 4, 2017

Five graphs for 2017: #3, interest rates vs. residential construction

- by New Deal democrat

For the last few years, I have picked out five metrics that particularly bear watching at the outset of the year. This year, there is a troika of factors that could bring about the next recession: a big increase in gas prices (#5 on this year's list), a surge in the US$ (#4), and -- today's installment -- a spike in interest rates

In 2013 as the result of the "taper tantrum," Treasury yields went from just under 1.5% to just over 3%. Mortgage rates rose similarly, leading to a near stall in the housing market. The pent-up demand from the large Millennial generation kept the market from an outright downturn.

Since the US presidential election, Treasury yields similarly spiked, so far to a high of just over 2.6%. In response, finally this week, mortgage applications turned negative YoY.

Although residential construction is a little less leading than permits, housing starts, or new home sales, it has the advantage of being a much less noisy series (shown in comparison with permits below):

Private residential construction has gone basically sideways since September 2015 (and thus is flat YoY in the first graph above), although post-Brexit there has been some improvement. I expect this series to continue to improve until sometime next spring when the post-election spike catches up with it.

The issue this year will be whether mortgage interest rates continue to rise, and if so, do they rise enough to cause an outright downturn in the housing market. That's what I'll watch in this graph.